<<< This is a repost as per Trees request - I think Trees intends it as a discussion piece. Blaze away! >>>>
Hi all,
Didn't get a chance until market close to have a look at the DT thread yesterday, and this sums up observations from the last few days...
MemeFx's DT Diary - Stops, Selection, Sizing, Sychology and Signal to Noise.
Hmm...don't know where to start, it all seems so intertwined.
Sychology
You all believe that psychology is the most important aspect of trading. Right?
Crap!
Apart from lip service, there is little mention of psych matters. Arrogantly assuming the mantle of pyscho-quant, I'll try and explain some approaches that might be helpful.
As a trader sitting at home, there is no one to coach you and force your actions and motivations to be questioned - you have to do that for yourself. The following is not a "you must do this to succeed" article, it's the psycho approach that works for me. Find your own - this might help.
Stock Selection
I know that choosing small caps offers you leverage and "excitement". We know the platitudes of the double edged sword of leverage, and it's nice to have an exciting trade. But is it best business practice to chase that excitement? In effect, stock selection == excitement factor. Really? Make your money and buy excitement I say. Dostoyevsky, author, alcohoic and problem gambler used to say (from memory) "my greatest joy is winning, my second greatest joy is losing". He was not a man without insight, despite his faults, and he recognised his problem and still could not deal with it.
Once you recognise that excitement is a component of the trade experience...be careful.
Stops
"Honour your stops". Easier said than done. I found it harder to honour stops on a speccie than a mid cap. One or two ticks down on 15c and then "hope" comes into it. One or two ticks on $11.00 and you have time think about the trade. The way I'm wired, the psychology dictates that I should trade larger priced stocks.
See the way the psych, stops and stock selection can be intertwined?
Position Sizing
I've always found it useful to size my position by the risk not the absolute position. Example $50k account, pscyhologically chosing a $250 stop, or backtesting choosing a 0.50% stop, a spec at 20c, with a stop at 19, allows me a position of $5k, a $20 stock with a stop of $19.75 allows a $20k position.
Look at that! Same risk $5k and $20k. The larger caps also have less variability in the liquidity, so liquidity risk is reduced. If you are desparate for excitement, you can buy a bucket load of a mid-cap with a margin account.
Collaterally
Should I do a (how to trade) course?
My approach to trading is as a business and I beleive that some sort of continuing education is essential in any business. I just can't argue in favour of stagnation and ignorance. I've never done a course, so I can't comment directly.
But think outside the squares. ( a single square is not enough for me ( I get so arrogant sometimes))
Perhaps do a sports psychology course? You'd be surprised.
Maybe spend structured time analysing the better traders on this blog? ie build generalisations on what works. I nice little idea that has been around since the Coppernican Revolution. Science works guys. Seriously.
Develop your own approaches? ( Why should my truths be as relevant to you as your truths might be?)
Signal to Noise
Really had to trawl the blog for a long time last night to find jewels of any meaning or insight.
What's happened?
I should go long barrows, everyone seems to be pushing one at the moment.
Yours In The Struggle, MemeFx, Psycho-Quant and Curmudgeonly Juke Box Operator. (with no training or degrees in nuffink)
